(PRWEB) August 11, 2005
The Federal Reserve raised interest rates this week by another 1/4 percent, with another raise expected on Sept. 20 of this year.
Assuming housing prices don't change and an initial interest rate of 5 percent, that means that on Sept. 20 (assuming another expected 1/4 percent interest rate hike), Californians will have to come up with an additional $133.29 a month, or gross income before taxes of another $205.27/mth. That's $2,463.20 a year. In other words, the median affordable income will then be raised to $72,943.20 a year, an increase of salary of at least 3.4 percent.
If interest rates keep climbing, the real estate market is in for a lot of problems. Although $2,463.20 in additional income a year might not seem like that great an increase considering the scale of things, note that that's just two minor rate hikes with more expected in the near future! And not only that, but according to BusinessWeek.com, 31 percent of all new single-family mortgages in 2004 were interest only! This means that many people are already financially stretched to their very maximum. And do remember, the numbers above are with a 20 percent down payment which is not nearly as common with interest-only mortgages.
Assuming the worse case, a 0 percent down payment and an interest only loan with the same 5 percent rate, the monthly amount is $2,210.12. Now add the two rate hikes to that rate and you get a monthly payment of $2,431.13, an increase of $221.01/mth, or $4,048.26 a year, almost double! And don't forget that interest-only loans generally have higher interest rates.
As you can see from these numbers, if interest rates continue to climb, we're definitely going to see real estate housing prices drop. The good news is that you can plan ahead and protect yourself today. You can, for example, refinance your property and lock in today's low interest rates for longer terms, the longer the better. And if you do purchase a new property, you should avoid purchasing at the upper limits of your budget and especially avoid interest-only mortgages.
Based on these same numbers, it's possible to also reverse the calculations to determine what the real estate housing price should be to be to make it affordable to Californians today? As you can expect it's quite a large decrease, beyond the scope of this release. You can read the full details of these reverse calculations at:
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Based in Ottawa, Canada, Stephane Grenier is the founder of the software firm LandlordMax Software Inc. (http://www.LandlordMax.com) specialized in fulfilling the property management needs of real estate investors and the author of the related blog Follow Steph (http://www.FollowSteph.com)